What is a 'Base Currency'
In the forex market, currency units are quoted as currency pairs. The base currency – also called the transaction currency - is the first currency appearing in a currency pair quotation, followed by the second part of the quotation, called the quote currency or the counter currency. For accounting purposes, a firm may use the base currency as the domestic currency or accounting currency to represent all profits and losses.
BREAKING DOWN 'Base Currency'
In forex, the base currency represents how much of the quote currency is needed for you to get one unit of the base currency. For example, if you were looking at the CAD/USD currency pair, the Canadian dollar would be the base currency and the U.S. dollar would be the quote currency.
The abbreviations used for currencies are prescribed by the International Organization for Standardization (ISO). These codes are provided in standard ISO 4217. Currency pairs use these codes made of three letters to represent a particular currency. Currencies constituting a currency pair are sometimes separated with a slash character. The slash may be omitted or replaced by a period, a dash or nothing.
The major currency codes include USD for the U.S. dollar, EUR for the euro, JPY for the Japanese yen, GBP for the British pound, AUD for the Australian dollar, CAD for the Canadian dollar and CHF for the Swiss franc.
Parts of a Currency Pair
In forex, currency pairs are written as XXX/YYY or simply XXXYYY. Here, XXX is the base currency and YYY is the quote currency. Samples of these formats are GBP/AUD, EUR/USD, USD/JPY, GBPJPY, EURNZD, and EURCHF.
When provided with an exchange rate, currency pairs indicate how much of the quote currency is needed to buy one unit of the provided base currency. For example, reading EUR/USD = 1.55 means that _1 is equal to $1.55. This directly says that in order to purchase _1, a buyer must pay $1.55. The currency pair quotation is read in the same manner when selling the base currency. If a seller wants to sell _1, he will get $1.55 for it.
Forex quotations are stated as pairs because investors simultaneously buy and sell currencies. For example, when a buyer purchases EUR/USD, it basically means that he is buying euro and selling U.S. dollars at the same time. Investors buy the pair if they think that the base currency will gain value in contrast with the quote currency. On the other hand, they sell the pair if they think that the base currency will lose value in contrast with the quote currency.